In 2020, COVID brought global manufacturing to a screeching halt. The pandemic exposed the complexities arising from the absence of local or regional supply chains. Other factors, such as climate change and political risks, have exacerbated this problem and led to the localization of supply chains. Unfortunately, the costs of relocating component manufacturing are enormous, particularly impacting small- and medium-sized enterprises (SMEs) that now face the challenge of the availability of capital and the ease of that availability. Large corporations always find a way to tap into pools of cheap and readily available capital. For smaller enterprises, however, this has always been difficult. The biggest disconnect is that there is not yet a unified policy to support manufacturing at the SME level without regard for the end industry or market in the United States, as in other regions.
There are ways for SMEs to confront this challenge, and many are already strategizing to meet it. Businesses successfully re-shoring their supply chains learned that to stay competitive, they require investment in Manufacturing 5.0, which encompasses automation and technology, including data analytics, machine learning, the Internet of Things (IoT), and artificial intelligence (AI). To make these investments, SMEs must have greater access to cheaper capital. Government incentives are essential to making this capital available.
What does the government need to do?
The U.S. government has made progress by offering some incentives to bring manufacturing back stateside, including expanding access to capital for small manufacturers. Targeted incentives, such as tax breaks, low-cost loans, and subsidies that address the core problems for SMEs, should be encouraged. Many government incentives benefit large corporations rather than SMEs, the backbone of U.S. manufacturing. The historic strategy of blindly incentivizing job creation is flawed and does not work. A more effective solution is for the government to offer tax credits to those SMEs that invest a certain percentage of their revenue to upskill their employees, invest in their manufacturing capabilities, or invest in research and development (R&D). The U.S. government can also look to the examples of other countries to create a more unified incentive policy. India, for example, has implemented an incentive policy based on production and is targeting businesses in specific sectors of the economy. The U.S. government can change capital investment regulations to make the availability of capital easier and less expensive for SMEs that re-shore their production.
What strategies should SMEs use?
It is imperative that SMEs evolve to stay competitive by investing in technology, employees, and R&D, all of which necessitate financial resources. This can be achieved by channeling surplus cash flows into reinvestment or exploring alternate funding sources such as grants, Small Business Administration (SBA) loans, and other accessible avenues. Another avenue worth considering is engagement with local associations, which can provide valuable insights into available options. The following are some strategies U.S. SMEs can take to not only enhance their sustainability but also bolster profitability:
- Strengthen the focus on automation, IoT, and the rapidly advancing field of AI. This strategy is foundational to improving efficiency, reducing costs, and making U.S. manufacturing economically viable. Currently available and newly emerging digital tools will enhance production capacity and production rates, reduce the cost of labor, and reduce exposure to volatility in labor availability. U.S. telecommunications companies are already offering solutions to businesses for automation, increased connectivity, and productivity. For example, implementing connectivity through the Industrial Internet of Things (IIoT) can enable real-time monitoring and control of manufacturing operations.
- Incorporate advanced manufacturing technologies. Advanced technologies, such as additive manufacturing (3D printing), advanced materials, augmented reality (AR), and digital twins, will increase efficiency, save money, and create new job categories.
- Implement data analytics and connectivity. Through data analytics and connectivity, manufacturers gain insights to optimize processes, predict maintenance needs, and reduce downtime by collecting and analyzing data from sensors, machines, and other sources. They also inform decision-making and improve efficiency.
- Upskill the workforce and create new job categories. While technology is essential, the human element is still critical for advancement. As such, upskilling and reskilling of the workforce is essential. According to the National Association of Manufacturers, many U.S. businesses require more skilled workers. To address this, companies can leverage incentives and investment in training programs, partnerships with educational institutions, and apprenticeship initiatives to develop a highly skilled workforce.
What does the future hold for SMEs?
While more meaningful government incentives are needed, companies, especially SMEs, must capitalize on the existing opportunities. Some may require guidance in unearthing untapped capital sources. Despite the hardships posed by COVID created numerous hardships, the disruption of the pandemic also motivated many companies to localize their supply chains and move their suppliers from China. Several even re-shored to North America aiming to ensure the stability and sustainability of manufacturing inputs. Though much depends on federal and state governments and SMEs, the future holds promise. The benefits, such as proximity to customers and markets, outweigh potential upticks in labor costs. Realizing this vision, however, hinges on reimagining government incentives in galvanizing SMEs in domestic components sourcing and substantial investment in automation, AI, and emerging technologies. This dynamic shift has the potential to breathe new life into local supply chains across the United States.
Disclaimer: The opinions expressed in this article are those of the author. They do not purport to reflect the opinions or views of Oberon Securities.
